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Accounting downside risk measures and credit spreads

Author

Listed:
  • Pervaiz Alam
  • Barry Hettler
  • Han Gao

Abstract

Purpose - This study aims to examine the association between predictive accounting downside risk measures and changes in credit spreads. Building upon the earnings downside risk (EDR) measure developed in prior literature, this paper introduces cash flow downside risk (CFDR). Design/methodology/approach - This study modifies an existing empirical framework (root lower partial moment) to calculate CFDR and applies it to a sample of firms between 2002 and 2013 for which credit default swap data are available. Findings - After validating the measure, this study identifies a positive association between CFDR and changes in credit spreads. This paper further shows the association between CFDR and credit spread changes is stronger than that between EDR and credit spread changes. Financial stability moderates the relationship between CFDR and credit spreads. Originality/value - This study proposes a novel measure of accounting downside risk, CFDR and demonstrates a negative association between this measure and future cash flow and a positive association between this measure and future credit spreads.

Suggested Citation

  • Pervaiz Alam & Barry Hettler & Han Gao, 2021. "Accounting downside risk measures and credit spreads," Review of Accounting and Finance, Emerald Group Publishing Limited, vol. 20(1), pages 103-120, July.
    • Handle: RePEc:eme:rafpps:raf-08-2020-0244
    DOI: 10.1108/RAF-08-2020-0244
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    Cited by:

    1. Lang, Qiaoqi & Ma, Feng & Mirza, Nawazish & Umar, Muhammad, 2023. "The interaction of climate risk and bank liquidity: An emerging market perspective for transitions to low carbon energy," Technological Forecasting and Social Change, Elsevier, vol. 191(C).

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